The National Bank of Romania Board members present at the meeting: Mugur Isărescu, Chairman of the Board and Governor of the National Bank of Romania; Florin Georgescu, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Leonardo Badea, Board member and Deputy Governor of the National Bank of Romania; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Csaba Bálint, Board member; Gheorghe Gherghina, Board member; Cristian Popa, Board member; Dan-Radu Rușanu, Board member; Virgiliu-Jorj Stoenescu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decisions, based on the data on and analyses of recent macroeconomic developments and the medium-term outlook submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent developments in inflation, Board members showed that the annual inflation rate had declined from 16.76 percent in November to 16.37 percent in December 2022 – only marginally above the forecast –, thus reaching a plateau in 2022 Q4, in line with expectations. It was noted that, over the period as a whole, the annual inflation rate had recorded a much more subdued increase than in the previous quarters – from 15.88 percent in September –, given the stronger disinflationary impact from the aggregate dynamics of the exogenous CPI components, mainly following the notably lower fuel prices amid the fall in crude oil prices and the appreciation of the leu against the US dollar. Minor additional disinflationary influences had stemmed from energy and administered prices, on account of some base effects, some Board members noted.
By contrast, the annual adjusted CORE2 inflation rate had posted a renewed, slight acceleration in 2022 Q4, contrary to forecasts, rising from 11.9 percent in September 2022 to 14.6 percent in December 2022. In addition, that time round, the advance had been mainly triggered by the non-food sub-component and to a lower extent by the hikes in processed food prices. Almost across-the-board and faster price increases recorded especially in the first two months of the quarter in the non-food and services segments could however be short-lived, probably reflecting late or additional cost increases, as well as adjustments in profit margins, in the context of still relatively robust consumer demand, though anticipated to weaken in the near future, several Board members deemed.
Following the analysis, it was agreed that the increase in the annual adjusted CORE2 inflation rate had still been ascribable to global supply-side shocks – amplified and extended by the war in Ukraine and the associated sanctions –, but also to the widespread drought in 2022. Their direct and indirect inflationary effects had been compounded in 2022 Q4 too by the high short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.
At the same time, it was observed that the dynamics of industrial producer prices for consumer goods on the domestic market had continued to see a slower increase in 2022 Q4, amid the steeper decline in the change in durables prices, indicating a decrease in the impact of adverse supply-side shocks on production costs over that period. However, short-term inflation expectations of economic agents had almost stopped their downward movement towards the end of 2022, the same as longer-term inflation expectations of financial analysts, which had thus remained above the variation band of the target, while the consumer purchasing power had eroded slightly in October-November 2022 as well, amid the annual growth of average net real wage moving deeper in negative territory, several members underlined.
As for the cyclical position of the economy, Board members showed that the new provisional version of statistical data reconfirmed the significantly stronger-than-expected economic growth in 2022 Q3, at a 1.2 percent pace, i.e. similar to that in the previous three months, implying a rise in the positive output gap in that period too.
By contrast, compared to the same year-earlier period, GDP growth had continued to decelerate in 2022 Q3 – to 3.8 percent from 5.1 percent in Q2 –, although remaining significant from a historical perspective, mainly on the back of gross fixed capital formation that time round, way ahead of the contribution from household consumption. The contribution of net exports had nevertheless strongly re-entered negative territory in Q3, given that the annual growth rate of imports of goods and services had notably exceeded that of exports thereof in terms of volume. Against that background, the growth rate of the trade deficit had accelerated considerably versus the same year-earlier period, despite the narrowing of the unfavourable differential between the lower annual change in import prices and that in export prices, whereas the annual rate of increase of the current account deficit had doubled, inter alia as a result of the strong worsening in the primary income balance.
As for the near-term outlook, Board members agreed that economic growth was likely to post a gradual slowdown in 2022 Q4 and 2023 Q1, under the impact of the protraction of the war in Ukraine and the extension of the associated sanctions. The developments implied a notable contraction in excess aggregate demand during that period, which was seen following, however, a higher path than had been expected in November 2022, while the annual dynamics of GDP were anticipated to gather slight momentum in 2022 Q4 amid a base effect.
It was noted that the latest high-frequency indicators pointed to private consumption as the main driver of annual economic growth in 2022 Q4, but also to a new significant positive contribution of gross fixed capital formation, largely due to construction. However, net exports were seen likely to exert a stronger contractionary impact, as exports of goods and services had recorded a considerable drop in their annual change in the first two months of 2022 Q4, much more pronounced than that of imports, inter alia in the context of the unfavourable evolution of external prices, which had triggered an acceleration in the annual increase in trade and current account deficits. Board members voiced again concerns over the magnitude and pace of widening of the current account deficit, while also underlining the major effects exerted in 2022 by the worsening of the terms of trade – seriously affecting other EU economies too –, as well as by the particularly strong pick-up in the flows of reinvested earnings and redistributed dividends, only to a small extent counterbalanced by the rise in inflows of EU funds to the current account.
Looking at labour market developments, Board members showed that the number of employees economy-wide had risen in October-November 2022 at a visibly slower pace than in H1, while the ILO unemployment rate had climbed again to 5.6 percent in December, from a 5.4 percent average in Q3, its differential versus the pre-pandemic values thus posting a renewed increase. Moreover, the annual growth rate of average gross nominal wage earnings had continued to advance at a markedly slower pace compared to the first part of 2022, reaching however increasingly higher values in the first two months of 2022 Q4, especially on account of pay rises in the private sector. Consequently, the unit labour cost in industry had posted a faster double-digit annual growth during that period, also following a sharper deterioration of labour productivity, under the impact of increased energy and commodity prices.
Under the circumstances, Board members emphasised again the need for close monitoring of labour market developments, considering inter alia the entrenched structural problems of the market, as well as the likelihood of larger wage hikes in the private sector in the context of high inflation, possibly moderated, however, in certain areas by firms’ constraints from elevated energy and commodity costs, as well as by weaker demand.
At the same time, it was noted that in early 2023 the labour shortage reported by companies had remained on the gradual downward trend visible in 2022 H2, while the revival of hiring intentions had occurred after a significant drop seen at the end of last year and in the context of mixed sectoral developments, all those suggesting a somewhat less tight labour market in the near future too.
Moreover, it was reiterated that, beyond the near-term horizon, the ability of some businesses to remain viable/profitable in the context of high costs would be probably challenged also by the cessation of government support measures, as well as by the need for technology integration, possibly leading to new restructuring or bankruptcy of firms. In addition, labour market would probably be increasingly impacted by the expansion of automation and digitalisation domestically, alongside the higher resort by employers to workers from outside the EU.
Turning to financial conditions, Board members showed that the main interbank money market rates had seen their gradual downward adjustment extend into January 2023, amid the excess liquidity in the banking system. Moreover, yields on government securities had posted new declines – relatively in line with developments in the region –, in the context of the marked improvement of investor sentiment towards financial markets in emerging economies, under the influence of expectations on a more moderate tightening of monetary policy by the Fed.
At that juncture, reflecting also an increase in the relative attractiveness of investments in domestic currency, the leu had exhibited again a strengthening trend versus the euro starting in mid-January 2023. Moreover, the domestic currency had appreciated further against the US dollar, as the latter had weakened even more against the euro, amid investors’ divergent expectations on the pace of monetary policy tightening by the Fed and the ECB in the near run.
Risks to the behaviour of the leu’s exchange rate continued, however, to come from the widening external imbalance and the uncertainties surrounding budget consolidation amid the war in Ukraine, as well as from a possible sudden worsening, against that backdrop, of the risk perception towards the local financial market, some Board members cautioned. Nevertheless, it was agreed that, over the near term, the opposite influences from the differential between domestic and international interest rates, including vis-à-vis some markets in the region, would probably continue to prevail, given the persistence of the favourable global financial market sentiment, with implications for capital flows.
At the same time, it was observed that the annual growth rate of credit to the private sector had decelerated in December 2022 as well, albeit more moderately, reaching 12.1 percent from 13.2 percent in November. That had owed to the slightly slower decline in the dynamics of the leu-denominated component – amid the larger volume of loans under government programmes –, but also to the steeper uptrend in the high rate of change of foreign currency loans, under the influence of developments in the non-financial corporations segment. As a result, the share of leu-denominated loans in credit to the private sector had continued to fall, to 68.8 percent in December from 69.4 percent in November.
As for future macroeconomic developments, Board members pointed out that, given the extension of energy price capping schemes until 31 March 2025 and the changes made to those schemes starting 1 January 2023, the new assessments indicated the outlook for the annual inflation rate to fall at a significantly faster-than-previously anticipated pace until mid-2024, especially as of 2023 Q3. Specifically, the annual inflation rate was envisaged to decline to one-digit levels starting in 2023 Q3 already – almost three quarters earlier than in the November 2022 forecast – and then to 7.0 percent in December 2023, far below the previously-anticipated 11.2 percent. For 2024 H2 it was seen falling at a visibly slower pace and then remaining slightly above the variation band of the target at the end of the projection horizon, i.e. at 4.2 percent, similarly to the prior forecast.
It was observed that the decrease in the annual inflation rate would be mainly attributable to supply-side factors, whose disinflationary impact was expected to rise progressively over the following quarters and to visibly affect the evolution of exogenous CPI components, but also core inflation dynamics to a certain extent. The major influences were anticipated to stem from increasingly strong disinflationary base effects and downward corrections of some commodity prices – inter alia of crude oil and agri-food commodities, amid the easing of wholesale markets –, as well as from the improvement of global production and supply chains. To those would add the influences presumably generated by the new setup of energy price capping schemes.
Moreover, it was agreed that the balance of supply-side risks to the new inflation outlook remained in relative equilibrium, at least in the near future, given the recent trends in key energy and agri-food commodity prices, as well as the nature of their major determinants.
Underlying inflationary pressures were expected to have a stronger-than-previously-anticipated impact, although progressively on the wane, until fading out completely towards the end of the new projection horizon, Board members concluded, given the new widening of the positive output gap in 2022 Q3, but also the outlook for its gradual contraction and closing in mid-2024.
It was noted that the prospective moderation in core inflation would also be increasingly supported by disinflationary base effects – especially in the processed food segment – and the return to normality of global value chains, as well as by the gradual decrease in short-term inflation expectations and in the dynamics of import prices, yet from recent values visibly higher than the forecasts. Over the near term, small opposite influences were, however, also expected from the gradual pass-through into consumer prices of increased costs for producers, retailers and service providers, mainly related to commodities and energy, several Board members pointed out. Under the circumstances, the annual adjusted CORE2 inflation rate would probably continue to rise until 2023 Q1 and then start to decline progressively, on a higher path than anticipated earlier, falling to 9.8 percent in December 2023 and to 4.7 percent at the end of the projection horizon, compared to the previously-envisaged 7.9 percent and 4.0 percent respectively.
Looking at the future cyclical position of the economy, Board members observed that, after having moderated only mildly in 2022, economic growth was expected to decelerate significantly in 2023, in the context of high energy costs and the protraction of the war in Ukraine, as well as amid the monetary policy stance and the fiscal consolidation. However, economic growth would witness a somewhat more visible-than-previously-anticipated revival in 2024, given the faster absorption of EU funds, inter alia under the Next Generation EU instrument. The outlook made it likely for excess aggregate demand to shrink somewhat more gradually starting 2022 Q4 and from a higher level than envisaged earlier, implying that the output gap would close three quarters later than previously projected and enter only slightly into negative territory towards end-2024.
It was shown that private consumption would probably remain the major driver of GDP advance, yet amid the strong slowdown in its growth during 2023, particularly against the background of still elevated inflation and higher lending and deposit rates for households, as well as under the influence of labour market developments and the uncertainty induced by the protraction of the war in Ukraine, likely to affect consumer confidence.
Furthermore, it was noted that a very large share of the GDP increase – markedly exceeding those in previous years – would probably be generated by gross fixed capital formation as well, whose dynamics were expected to decline significantly in 2023, but to remain particularly high from a historical perspective over the following two years. That would be due to the absorption of a sizeable volume of European funds under the overlapping multiannual financial frameworks and the Next Generation EU programme, conducive to fostering public investment with stimulative effects on the private sector, yet in an environment still marked by high uncertainties and costs, as well as by tighter financial conditions.
Net exports would probably continue to exert a contractionary impact over the next two years, albeit progressively on the wane, amid a relatively more pronounced deceleration of the advance in the volume of imports compared to that in the volume of exports of goods and services, reflecting especially the dynamics of domestic absorption, but also the evolution of external demand. Against that background, after a new significant widening in 2022, the current account deficit as a share of GDP would probably see only slight corrections in 2023 and 2024, staying considerably above European standards. Board members viewed those developments as particularly worrisome, given the risks to inflation, external financing costs and, ultimately, to economic growth sustainability.
At the same time, Board members pointed out the significant uncertainties and risks to the outlook for economic activity, hence to medium-term inflation developments, generated by the war in Ukraine and the related sanctions, mainly through the effects exerted on households’ and investors’ confidence, as well as on their income, but also by affecting the economies of major trading partners and the risk perception towards economies in the region, with an impact on financing costs.
In that context, Board members underlined again the importance of attracting EU funds, especially those under the Next Generation EU programme. That was conditional on fulfilling strict milestones and targets for implementing the projects, but was essential for carrying out the necessary structural reforms, energy transition included, as well as for counterbalancing, at least in part, the contractionary impact of supply-side shocks, compounded by the war in Ukraine and by the tightening of economic and financial conditions worldwide.
Significant uncertainties and risks were, however, further associated with the fiscal policy stance as well, Board members agreed. They referred, on one hand, to the public deficit target set for 2023 in order to continue budget consolidation amid the excessive deficit procedure and the hefty increase in financing cost and, on the other hand, to the packages of support measures to be implemented or extended during 2023, in a very challenging economic and social environment domestically and globally, with potential adverse implications for budget parameters.
Board members were of the unanimous opinion that the reviewed context overall warranted keeping the monetary policy rate unchanged, with a view to bringing the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia by anchoring medium term inflation expectations, while minimising costs in terms of economic growth.
Moreover, Board members reiterated the importance of further closely monitoring domestic and global developments so as to enable the NBR to tailor its available instruments in order to achieve the overriding objective regarding medium-term price stability.
Under the circumstances, the NBR Board unanimously decided to keep the monetary policy rate at 7.00 percent. Furthermore, it decided to leave unchanged the lending (Lombard) facility rate at 8.00 percent and the deposit facility rate at 6.00 percent. In addition, the NBR Board unanimously decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.